What Are Market Corrections? How China’s Retaliatory Tariffs Shook S&P 500, What Next? Explained
Nobody can predict with certainty whether a correction will reverse or turn into a bear market. Trump, inflation, government outlays will determine whether the US markets will tumble further
The US stock market plummeted after China announced 34% additional tariffs on US goods, escalating a trade war that has rattled investors around the world.
A few months ago, the benchmark S&P 500 was unbreakable, hitting all-time highs. But since its peak in February 19, the index has been in red for 2025.
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Weak economic data and concerns over President Donald Trump’s far-reaching tariffs have sent the index into a correction once again. Investors and companies are scrambling for clarity as to what comes next.
Will market going to tumble further or is this the worst of it? Let us understand.
What Are Market Corrections?
Most people consider a correction to have occurred when a major stock index such as S&P 500 Index or Dow Jones declines by more than 10% from its most recent peak.
It is called a correction because historically the drop often “corrects" and returns prices to their longer-term trend.
Nobody can predict with any degree of certainty whether a correction will reverse or turn into a bear market.
“The 10% trigger for a correction is an arbitrary, round-number threshold. But it serves as a signal that investors have turned pointedly more pessimistic about the market," according to a report by The New York Times.
Why Do Market Corrections Take Place?
Market corrections take place when investors are more motivated to sell than to buy stocks. Sometimes weak economy or the fear of a slowdown, or investor sentiment that the market is too hot and prices too high could make investors pull out of the market.
Events that are not purely economic — such as wars, oil supply shocks, etc — can also spook investors, leading to a dip in the market.
Usually, bear markets occur when a stock market tumbles by at least 20%. They can last any length of time but bear markets tend to last longer than market corrections. Moreover, market corrections are not as damaging as bear markets are to the market.
History Of Market Corrections
According to a recent report from Deutsche Bank, the US stock market has experienced 60 corrections (defined as when the market drops 10% from a 52-week high) since 1928. The corrections are considered to have ended when the market does not fall another 10% within the next 30 trading days.
Deutsche Bank found that 44% of the time, these corrections occurred around a recession. Roughly 12% of the time, the corrections occurred during a recession, while 32% of the time, a recession followed within the next year. However, the remaining 56% of these corrections were not associated with a recession at all.
Interestingly, 17 of the 60 corrections turned into full-blown bear markets, where the S&P 500 falls at least 20% from its most recent all-time high. But the majority of the corrections, 42, ended with the stock market down somewhere between 10% and 20%, as per the report.
Does Market Corrections Lead To Bear Markets?
Data shows that may not be the case always. In fact, three of the four corrections does not lead to a bear market.
Trump’s tariffs have put the market and the economy in a lot of uncertainty. However, the market’s elevated valuations at the start of the year have played a part in the recent volatility too. “When valuations are high, the margin for error is slim. It does not take much to tip the market downward," as per an article in Yahoo Finance.
Will Market Turmoil Turn Deeper?
Trump Factor: With Trump being in the job for 70 days, the economic and market outlook don’t look promising. “The US economy is at an inflection point and on shaky ground," says Anthony Termini, an investment analyst at Annuity.org, as quoted by US News. “Consumer confidence is as low as it has been in two years, and Americans now believe that inflation isn’t going away anytime soon. Layer any tariffs on top of that, and there is a high likelihood of recession in the third or fourth quarter this year. This means there is considerably more stock market risk today than just a few months ago."
Inflation: The US clocked inflation at 2.8%, higher than the Federal Reserve’s 2% target. Inflation will determine whether the Fed decides to cut interest rates, which will trickle down to the costs borrowers are paying as well as impact market liquidity. “The biggest issue is inflation running high … which will delay rate cuts along with uncertainty about how the oncoming trade wars will play out," says Alejandro Zambrano, chief market analyst at ThinkMarkets in London.
Government Outlays: While the Trump administration promises $1 trillion in government spending, the government has a $1.9 trillion budget deficit for fiscal year 2025, according to the US Congressional Budget Office. The CBO notes that’s about 6.2% of the gross domestic product – well above the 3.8% that deficits have averaged over the past 50 years, as per US News. Currently, the US is spending more cash than it collects, which could lead to foreign US Treasury buyers demanding higher interest rates when purchasing American bonds. The CBO estimates the deficit will rise to $2.5 trillion by 2035.
Global Economy Impact
US Treasury Secretary Scott Bessent stressed that the plunge in US stocks was driven more by the emergence of China’s DeepSeek artificial intelligence tool than by Trump’s policies.
The White House touted stronger-than-expected job data on Friday, after a Labor Department report showed the US economy added far more jobs in March than predicted.
But Trump’s sweeping import tariffs could test the labour market’s resilience in the months ahead amid sagging business confidence.
Meanwhile, Canada’s total employment fell and the unemployment rate ticked up in March. The country’s first monthly decrease in jobs since 2022 was prompted by uncertainty around tariffs, which forced companies to pause hiring and spurred some layoffs.
In Japan, one of the top US trading partners, Prime Minister Shigeru Ishiba said the tariffs had created a “national crisis" as a plunge in banking shares on Friday set Tokyo’s stock market on course for its worst week in years.
The European Union is divided on how best to respond to Trump’s tariffs. Countries such as Ireland, Italy, Poland and the Scandinavian nations are cautious about retaliating against the US.
French President Emmanuel Macron has called on companies to freeze investment in the US. However, French Finance Minister Eric Lombard later cautioned against tit-for-tat countermeasures on the US tariffs, warning this would also rebound on European consumers.
(With inputs from Reuters)
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